Chances are that if you have bought a product produced in Michigan in recent years, you’ve seen the product labelled as “Made in Michigan” as businesses have tried to point out their local connections to consumers in the hope that their local connection will distinguish their business from others. There is evidence that suggests that businesses may be onto something, as consumers have expressed a preference for local products. A 1,000 person survey conducted by American Express found that 93% of consumers believe it’s important to support local businesses and 73% consciously shop at local businesses to support their success. While an increased demand for local products has seemingly increased across all sectors of the economy, it has been particularly strong in the food economy. A survey of 1,100 grocery shoppers found that 70% of shoppers want to buy locally grown food, even if that means paying more.

However, many businesses are doing much more than simply slapping a label on an already existing product; some are building their entire business model around the concept that people will pay more for locally produced goods. A prime example is Shinola. Prior to opening, the company commissioned a focus group and asked consumers if they preferred to purchase a $5 pen made in China, a $10 pen made in the U.S.A., or a $15 pen made in Detroit. They discovered that enough people would pay the increased price for a Detroit-made product to support a viable business. Of course companies like Shinola are not without their critics as people have pointed out that Shinola is not locally owned which can make its Detroit-centric branding look like a disingenuous way to simply mark up the price on an otherwise mediocre product for the benefit of the out-of-town owners of the company. Regardless of the criticisms, looking to the grocery shopper survey above and the results of the Shinola focus group, it appears that there is a strong market for fruits and vegetables grown in Detroit.

Consumers are drawn to locally produced products and local businesses for several reasons. Specifically in regards to food, many consumers seek to buy local products to strengthen their local economy, promote a stronger sense of community, and reduce the impact on the environment caused by the globalized food system. Based on the evidence that consumers are demanding locally produced products and may be willing to pay a premium for them, many have started to ask the question of just how much food are urban farms currently supplying to the local population and what is the capacity for expansion?

The answer to the first question of how well current urban farms are meeting local demand is: not very well. According to the Economic Analysis of Detroit’s Food System conducted by the Detroit Food and Fitness Collaborative, Detroit farmers are meeting only 4% of the current agricultural demand in Wayne County. This is not uncommon. A similar study in Cleveland found that urban farms in Cleveland were only supplying about 1.7% of the total amount of fresh produce consumed by Cleveland residents. The answer to the second question of what the capacity to expand agricultural production in the city to create a more localized food system is another story.

Kathryn Colasanti, Charlotte Litjens, and Michael Hamm sought out to answer the question above in 2010. They started by looking at the total number of publicly owned, structureless parcels in Detroit, excluding parkland. They found that in Detroit there were 44,085 such parcels of property, which totaled 4,848 acres throughout the City. Next, they looked to how much food could potentially be grown on the thousands of vacant areas. This was done by looking to how the total poundage of fruits and vegetables currently consumed by Detroiters and factoring in the seasonal limitations that farmers traditionally face. Lastly, the study factored in crop loss and differing yield rates based on skill and farming methods.

Overall, the production capacity of Detroit’s vacant land depends on two distinct factors: the degree to which a farm is able to utilize an unheated hoophouse to extend its growing season and what the farm is able to yield based on skill and production method. The first important factor is season extension. If a farm can utilize an unheated hoophouse, it can reduce natural seasonal limitations and extend its growing season. This, in turn, will increase a farmer’s ability to meet local demand because the farm will be able to grow more with less land. The second important factor is farming method and skill. Assuming a farmer is using a biointensive method of farming, what their yield is will depend on their skill. A more skilled farmer will be able to get more out of their land than a novice farmer.

The studies findings can be summarized as follows: Detroit has the capacity to meet the majority of the current fresh fruit and vegetable consumption of its residents, but just how much land is needed depends on the two factors described above.

If no season extension techniques are used, then Colasanti estimates that Detroit’s urban agriculture network could produce 65% of the vegetables and 39% of the fruits currently consumed by Detroiters on anywhere from 511 to 1,839 acres. If season extension techniques are used, Colasanti estimated that Detroit’s urban agriculture network could produce 76% of the vegetables and 42% of the fruits currently consumed by Detroiters on anywhere from 568 to 2,086 acres of property. While Colasanti estimated that there was 4,848 acres of vacant, publicly owned land in Detroit, that number is likely higher today. Therefore, it’s likely that Detroit farms could supply Detroiters with a sizable portion of the fruits and vegetables they currently consume by repurposing less than 50% of the publicly owned property in Detroit for agriculture use. Even using the undoubtedly outdated figure that estimates the amount of Detroit’s publicly owned vacant property at 4,848 acres, it is possible to provide Detroiters with the majority of vegetables they currently consume by repurposing a mere 11% of the existing 4,848 acres currently in the public inventory.

While the study shows that Detroit has the capacity to meet a large portion of the current vegetable and fruit consumption of its residents, it is important to emphasize that translating that capacity into reality is an entirely different question and there are three main obstacles that need to be addressed.

First, the property surveyed by Colasanti will not all be available for agriculture for a variety of reasons including, but not limited to, soil contamination, location, and soil condition. While soil condition and contamination can at times be remedied, location cannot. Some of the property surveyed by Colasanti is undoubtedly isolated vacant parcels that exist between two occupied structures. While someone may be able to start a garden on that site, it may be difficult to maintain a for-profit farm on such a small space. Further, if expansion was ever pursued, those involved would have to look for non-contiguous lots which would bifurcate the farm or garden and create an operational obstacle.

Second, the City must be a willing partner and must be willing to sell property for agricultural developments, which is currently not the case. Currently, the City has no policy regarding land disposition for agricultural projects. This often means that requests to purchase property for an agricultural development are either ignored or refused. As a result, farmers and gardeners currently don’t have a strong working relationship in regards to land purchasing with the largest landowner in the City.

Lastly, each individual urban agriculture enterprise must be financially viable on their own. While the scale or urban agriculture ventures vary widely, most are less than 2 acres. small-scale farming is often difficult financially. A survey of small-scale vegetable farmers in 2005 estimated that farm owners with a farm of less than 3 acres had a net cash income that translated to $4.96 per hour. This can be achieved in numerous ways, including organizing farm cooperatives or increasing the average growing capacity of each individual farm in Detroit. However, as it currently stands, very few farm owners in Detroit are making what could be considered a living wage.

In summary, surveys and studies show that the demand for locally produced agricultural goods is strong and studies also show that Detroit is uniquely positioned to meet that demand by repurposing a rather small percentage of publicly owned vacant land for agricultural production. However, to translate the capacity for expansion into reality, the City of Detroit must become a willing partner and work with Detroit’s farmers to clearly define how much property it plans to dedicate to commercial agricultural operations, where that property will be, and how it will be sold to farming enterprises. In turn, farmers must develop a sustainable business model to ensure that the farming business makes enough to support themselves and their families.

The Mayor of Los Angeles signs
the City’s first-ever Sustainable City Plan

While it may be hard to combat things like greenhouse gas emissions at the local level, many cities are finding that there are a whole host of environmental issues that are best addressed by local government. Over the last decade, cities across the country have started to talk about what can be done at the local level to make themselves more environmentally sustainable. Just what “sustainable” means varies from city-to-city, but in general it at the very least means scrutinizing development projects through an environmental lens. In taking an environmentally sustainable approach to development, the hope is that a city will develop in a way that makes it more resilient to future resource scarcity and climate change as well as more socially just for its residents.

While cities like Portland, San Francisco, and Seattle have always been leaders in sustainability, they are by no means alone today. Cities of all different sizes are developing long-term sustainability plans and creating city agencies to implement those plans. For example, Baltimore, Cleveland, Chicago, Pittsburgh, and Indianapolis (just to name a few) all have adopted a long-term sustainability plan and have created a city agency to oversee the implementation of the plan. Even Grand Rapids has developed a sustainability plan and charged the Office of Energy and Sustainability with implementing the plan. While former-mayor Kenneth Cockrel created an Office of Energy and Sustainability in 2008, it did not survive long and no sustainability plan was ever crafted. Today, Detroit is without a long-term sustainability plan of any sort or any city department dedicated to sustainability. This makes it the exception among large American cities; Detroit is the only of the country’s twenty most populous city’s to have no formalized, long-term sustainability plan.

The lack of direction on the issue of environmental sustainability can be felt by Detroit’s urban agriculture community. In developing long-term sustainability plans, many cities have sought to improve resident health through boosting the local food economy. This has typically included providing support to urban farms and gardens in the form of increasing the amount of City-owned land under cultivation. As the implementation of various cities sustainability plans have progressed, so has their dedication to urban agriculture. This month, Atlanta hired its first Urban Agriculture Director. Operating within Atlanta’s Office of Sustainability, the director will be responsible for a wide range of activities related to urban agriculture in the city of Atlanta, including agricultural policy development and the conversion of brownfields into urban gardens. The director will also work with community organizations and various City departments to improve growers’ access to public and private land, facilitate the permitting process, obtain necessary zoning permits, support local initiatives, manage code compliance, and address other issues to advance urban agriculture in Atlanta.

If you talk to any farmer or gardener in Detroit, one of the biggest complaints is how difficult the City of Detroit has been to work with regarding agriculture projects. Typically, a farmer or gardener that contacts the City is greeted with skepticism. Farmers often find themselves explaining what a hoophouse or a raised bed is to a confused City employee. The languishing of applications to purchase City-owned property has become routine and expected. All of this points to a basic problem regarding the relationship between the urban agriculture community and the City; the City lacks the appropriate personnel to be able to promote and manage the City’s farms and gardens and also lacks any comprehensive sustainability plan that envisions the future of urban agriculture in Detroit.

Developing a long-term sustainability plan and having an urban agriculture director in Detroit City government would be enormous developments for Detroit’s urban agriculture community. It would signal to Detroit’s urban agriculture community what the City is planning and give them a point person within City government. It’s time the City caught up with the rest of the country.

Have you ever wondered about the laws and regulations that may impact your urban farm or garden, catering business, or bakery but simply didn’t know where to begin? The Detroit Good Food Enterprise Legal Handbook is here to help! Prepared by the Great Lakes Environmental Law Center and Keep Growing Detroit, the Legal Handbook is a resource for local, community-focused, food-related businesses and nonprofits in Detroit. It focuses on entity choice law, real property law, contract law, and employment law.

While the Detroit Good Food Enterprise Legal Handbook is a tool to help you to start to think about the legal issues that may be relevant for your enterprise, it should not be taken as legal advice! If you find yourself in need of legal advice, please contact an attorney.

The Detroit Good Food Enterprise Legal Handbook can be accessed for free at the link below:

Urban agriculture inspires a lot of strong feelings and, for many those strong feelings are overwhelmingly positive. In particular, many Detroiters have been drawn to urban agriculture for the multi-faceted benefits it provides. An urban farm or garden can take a vacant lot, which is a negative force in countless Detroit communities, and turn it into an empowering space where community residents come together to grow their own food for themselves and others. The food grown often provides a health benefit to communities that typically lack locational and financial access to fresh and healthy produce. Further, transforming a vacant lot(s) turns a negative economic driver into a positive economic driver as urban farms and gardens have been found to raise neighborhood property values by as much as 9.2%. On top of all of this, urban farms and gardens provide environmental benefits in the form of stormwater managementand social benefits to the surrounding community. What’s not to love?

Despite the many benefits described above, urban agriculture is not adored by all. Many people believe that agriculture in a City environment will draw rodents and other pests to a neighborhood or simply think that it’s ugly and don’t want to see it in their neighborhood. Another consideration is that many current Detroit residents moved to the City during the mid 20th century as part of the Great Migration that saw 6 million black southerners leave their homes for industrial centers like Detroit. Many blacks who are former-southerners don’t have fond memories of rural life. For many, rural life was defined by terror and agriculture, rather than being a positive force, was a tool of oppression. For these Detroit residents, the urban farm or garden across the street may be more than an eyesore; it may be regarded as a disturbing reminder of a past that they traveled far and worked hard to leave behind.

When a neighbor has a dispute with their neighbor in some form or fashion, they often complain to the City. In the case of urban farms and gardens, many neighbors file a complaint with the Department of Public Works alleging that the farm or garden violates property maintenance rules. When such a complaint is made, an inspector from the Environmental Enforcement section comes out to inspect the property and make sure it is being properly maintained. If that inspector finds your property to be in violation of property maintenance rules, then a ticket may be issued.

So what are these property maintenance rules? In short, every property owner must keep the grass cut to a reasonable level and ensure that any property waste that is on their property is properly stored and disposed of. While this may seem fairly simple, it can be a trap for the unwary. The most common property maintenance violation that I have encountered is the violation for having solid waste on the property. Solid waste violations are tricky for two reasons. First, the definition of solid waste as it exists in the City Code is largely unhelpful. Certain things are clearly designated as solid waste, such as downed trees and excavated stumps, paper, cardboard, yard clippings, and food wastes not being used for agricultural purposes. Further, certain things are clearly designated as not being solid waste, such as food waste if being used for an agricultural purpose and uncontaminated, excavated soil. However, outside of those examples, the line between solid waste and a product that has a productive use is vague. Second, the initial determination of what is and is not solid waste is made by an inspector from the Environmental Enforcement division. This is problem more so for urban farmers and gardeners that live off-site. For off-site farmers and gardeners, there is an increased chance that the inspector will inspect your farm when you are not present which makes it more likely that the inspector will issue you a ticket. While you will have a chance to contest the ticket at an administrative hearing, doing so will involve spending a day downtown at the administrative hearing as well as the stress that often accompanies such situations.

So far, we’ve talked about why neighbors might complain about your urban farm or garden, what typically happens when neighbors do complain, and the basic rules that govern how you must maintain your property. The next natural question is what can you do to ensure you don’t get ticketed. As mentioned above, the most common ticket is for having improperly stored solid waste on the property and the definition of what is and is not solid waste is not always helpful. The best way to avoid a ticket is to keep anything that an inspector may regard as solid waste in a container. It is important to realize that what you think of as a useful product may be regarded by an inspector as waste. For example, while you might be planning to utilize a stack of pallets for some productive purpose, an inspector may see them and presume they are garbage.

It is also important to remember that avoiding a ticket is not the same as avoiding a complaint and the subsequent inspection. If a neighbor files a complaint with the Department of Public Works and alleges that your property is not maintained in compliance with the property maintenance code, then an inspector is required to visit the property. Simply being subject to an inspection can be stressful. To avoid complaints, it is important to think of what you can do that goes above and beyond the law to avoid neighbors filing complaints. This may involve actively maintaining good relationships with your neighbors and asking them what they think a well maintained urban farm should look like.

Hantz Woodlands’ President Mike Score was on WDET last week to talk about its second community tree planting, which it held this past Saturday. On a previous post, I detailed why Hantz Woodlands’ use of volunteers was likely illegal. In short, there is a strong legal presumption that individuals who work for a for-profit business, such as Hantz Woodlands, are regarded as employees for the purpose of many state and federal employment laws. Those employment laws provide employees with specific statutory benefits, such as minimum wage and workers compensation. This is true regardless of any agreement between Hantz Woodlands and its volunteers as a worker and its employer cannot contract around the statutory benefits and protections provided by employment law. If they could, then employment laws wouldn’t have much teeth.

During Mike Score’s WDET appearance, Jerome Vaughn asked him directly about Hantz Woodlands’ practice of utilizing volunteers to operate its for-profit business. Mr. Score acknowledged that some people had complained about Hantz Woodlands’ use of volunteers. He justified the practice by reasoning that since Hantz Woodlands’ business if focused on creating a positive change in an area of the City that has been long-neglected, it provides some form of social benefit. This begs the question: why not incorporate a nonprofit corporation, which is the typical entity choice for enterprises focused on providing a social rather than private benefit, to do this work? According to Mr. Score, the benefit of having Hantz Woodlands’ be a for-profit business is that it will have the operating budget to sustain the impact that the volunteers make going forward.

First, it is important to point out the falsehood that exists in Mr. Score’s reasoning. Operating budgets are not something unique to for-profit businesses. All enterprises need some start-up capital to being its work. All enterprises, once they have received their start-up capital, need to develop some operating budget to determine how that money will be best spent. This is no different for nonprofit corporations as opposed to a limited liability company. How that start-up capital is obtained is also not all that different for nonprofit corporations; in fact, nonprofit corporations have a greater array of methods for obtaining start-up capital than for-profit businesses. A nonprofit corporation can not only receive capital investments from shareholders and take out loans, but it can also accept grants from private foundations and can receive tax-deductible donations assuming the nonprofit is a 501(c)(3) organization. Further, a 501(c)(3) organization is exempt from paying corporate income taxes which means that a nonprofit tax-exempt corporation gets to keep more of the money it has and dedicate it to its tax-exempt purpose.

However, nonprofit corporations come with a key restriction. As a general rule, a tax-exempt nonprofit corporation cannot be operated to provide private benefits to a specific individual. Instead, a tax-exempt nonprofit corporation must be operated for a public benefit. This is often referred to as the private inurement doctrine and it is one of the defining characteristics of tax-exempt nonprofit corporations; in exchange for the IRS granting 501(c)(3) organizations an exemption from corporate income taxes and the fundraising advantages described above, the nonprofit corporation must not be operated for the purpose of benefiting private individuals. In contrast, a limited liability company such as Hantz Woodlands’ is not restricted from distributing its assets for private benefit.

The distinction between nonprofit corporations and limited liability companies doesn’t just matter for those involved with starting and operating those entities. It also matters for those that work for the entity. While the employment laws that have been enacted at the state and federal level are several, each generally defines an “employee” as an individual employed by an employer or a person permitted to work by an employer. At least part of the reason why volunteers have been regarded as outside of the employee classification as defined by several employment laws is because they are typically utilized by nonprofit corporations which are organized to provide a public benefit. In theory, there is a reduced need to provide the statutory protections and benefits that employment laws provide to the volunteers of a nonprofit corporation because the benefit their work provides is legally required to be for some public benefit. Therefore, there is less of a concern that the nonprofit corporation will exploit volunteer workers for private gain. Since a limited liability company such as Hantz Woodlands’ is not legally required to operate for a public benefit, there is a real concern that volunteers are being utilized for private benefit.

While Mike Score can argue that the work of Hantz Woodlands’ benefits the community, this argument can be made by almost any enterprise. Should a Detroit housing developer be able to utilize volunteers to construct homes in a heavily vacated neighborhood? Surely the housing developer is providing a community benefit by creating new housing. Should Whole Foods have been able to utilize volunteers to construct its new store? After all, Detroiters have long complained about not having easy access to quality grocery stores and by providing that point of access Whole Foods is providing a benefit to the community. Almost all for-profit enterprises provide some public benefit; the key is that for-profit enterprises are not legally required to provide a public benefit.

It may be that the Hantz Woodlands project is good for the surrounding community in that it reduces blight and raises neighborhood property values. However, it is cruelly ironic for a for-profit business to justify its use of volunteers as opposed to paid employees by stating that its business is providing a public benefit. If Hantz Woodlands was truly dedicated to providing a public benefit it would either be a nonprofit corporation or would be hiring employees and giving them all of the benefits required by law to do its work. While Hantz Woodlands might believe what its doing if valuable and ethical, but the law is the law and it is violating it.

Many tax-exempt, nonprofit organizations (TENPs) that focus on creating a just food system through urban agriculture are in what I like to refer as the “501(c)(3) dilemma.” On one hand, TENPs are often under pressure from traditional funders, such as large foundations, to make their operations more financially sustainable. To become more financially sustainable, TENPs are encouraged to figure out ways to generate revenue while carrying out a charitable purpose. On the other hand is the Internal Revenue Service (IRS). The IRS is often very skeptical of TENPs conducting a business activity that generates revenue. It closely examines revenue generating activity to determine whether it is an activity that is related to the organization’s charitable or educational purpose and, if it determines that it is unrelated, the TENP may risk being subject to additional tax liability and even may risk its tax-exempt status. To make matters worse, the application how the IRS examines revenue generating activity conducted by TENPs has often been inconsistent, which has created a lot of uncertainty in this area of the law.

This blog post will address revenue generation restrictions contained within the Internal Revenue Code that all TENPs should be aware of. It will also address how the IRS has treated urban agriculture focused TENPs that have conducted revenue generation activities, and tips to avoid additional tax liability and revocation of your organization’s tax-exempt status.

When nonprofit organizations talk about being “tax-exempt” the tax that is being referred to is the corporate income tax. The federal corporate income tax is governed by the Internal Revenue Code. Pursuant to 26 U.S.C. § 11, all corporations, including nonprofit corporations, are subject to a federal tax on all income. The federal corporate income tax is assessed yearly and varies from 15% to 35% depending on the income for the corporation in a given year.

However, many nonprofit corporations are exempt from the federal income tax described above pursuant to 26 U.S.C. § 501. Section 501(a) states that an organization that is exempt under section 501(c) “shall be exempt from taxation” under the Internal Revenue Code. Section 501(c) contains several categories of exemption, but section 501(c)(3) is by far the most popular. The popularity of the 501(c)(3) exemption stems from two additional advantages bestowed upon 501(c)(3) beyond tax-exemption. First, donations made to 501(c)(3) organizations are eligible for a tax deduction. Tax deductions operate to reduce the real costs of charitable gifts by providing donors with tax savings that correspond with the donor’s income level and the amount of the donation. Second, 501(c)(3) organizations are typically favored by private foundations, such as the Kresge Foundation, for distributions of financial resources. Private foundations are obligated by the Internal Revenue Code to distribute most of their funds to other charitable organizations, and this is typically done by providing grant funding to 501(c)(3) organizations.

Despite the two additional advantages of 501(c)(3) organizations, it is also the most restrictive tax-exempt status contained within section 501(c). According to regulations contained in 26 C.F.R. § 1.501(c)(3), in order for a nonprofit corporation to qualify for 501(c)(3) status, it must pass both an “organizational test” and an “operational test.” The “organizational” test relates to a 501(c)(3) organization’s Articles of Incorporation and mandates that the nonprofit organization be organized exclusively for one or more exempt purposes as described in 26 U.S.C. § 501(c)(3).The “operational” test relates to how an organization that has been granted 501(c)(3) actually operates and, as such, is slightly more complex. The “operational” test requires 501(c)(3) organizations to “engage primarily in activities which accomplish one or more of the exempt purposes specified in 501(c)(3).” Most urban agriculture organizations qualify for 501(c)(3) status by focusing on either a charitable or educational purpose.

On top of the organizational and operational restrictions, all tax-exempt organizations also

must comply with revenue generation restrictions. In general, revenue generation activities of 501(c)(3) organizations are divided into two categories: business related to the organization’s exempt purpose and business unrelated to the organization’s exempt purpose. According to 26 U.S.C. § 511, the income of an organization will be subject to an unrelated business income tax (UBIT) if:

1.) The income is from a trade or business,

2.) Such trade or business is regularly carried on by the organization, and;

3.) The conduct of such trade or business is not substantially related (other than through the production of funds) to the organization’s performance of its exempt functions

In general, before any 501(c)(3) nonprofit organization conducts revenue generation activity on a regular basis, it should assess whether the business activity will be regarded as “unrelated business activity” and therefore subject to the “unrelated business activity tax.” It should also assess whether the business activity may cause the organization to run afoul of the “operational test” and jeopardize the organization’s tax-exempt status. These two issues should be assessed separately; while the rules regarding unrelated business income and the operational test do interact with one another, it is currently unclear exactly how they interact.

In regards to revenue generation activity, it is generally helpful to first analyze whether or not it would be regarded by the IRS as an unrelated business activity. Of the three factors listed above, the last is the most important. Unfortunately, the IRS has typically taken a hard line against tax-exempt organizations selling food. In a recent private letter ruling, the IRS denied 501(c)(3) status for a nonprofit corporation that sought to operate a local farmers’ in an economically depressed neighborhood in order to provide local farmers’ with a market for direct sales and local residents with a source of high-quality, locally grown products. The IRS stated that by operating the farmers’ market, the nonprofit organization was engaged “in substantial non-exempt activity similar to a commercial enterprise and marketing service.” The IRS also stated that providing a venue for the sale of items for the benefit of private individuals does not qualify as a tax-exempt activity under 501(c)(3).

Based on the private letter ruling described above, the sale of produce grown by the organization or by other organizations or individuals would likely be regarded as unrelated business activity and thus any income generated by that activity would be subject to the unrelated business incometax. However, that is not all. The an organization conducting produce sale operations should also be concerned about jeopardizing its tax-exempt status. To be safe, most organization’s like to be sure that at least 51% of their activities and financial resources are dedicated to their tax-exempt purpose. Therefore, if your produce sale operations start to become a predominant part of your operations, your organization may be at risk of having its tax-exempt status revoked.

While the IRS has typically treated produce sales operations that sell food indiscriminately to the public as business activity that is unrelated to a tax-exempt purpose, there are ways that a 501(c)(3) urban agriculture organization can structure its produce sale operations to comply with tax laws and regulations.

One possible way may be to restrict produce sales almost exclusively to low-income individuals at costs that are below market. In regards to 501(c)(3) organizations focused on developing and selling affordable housing, the IRS has regarded such sales as for an exempt purpose if the sales are made to low-income individuals and families at prices well below the market rate. This option would entail carefully documenting the income of individuals to whom produce is sold and ensuring that prices are low enough that the organization doesn’t produce any profit.It should be noted that many urban agriculture organizations may feel uncomfortable with asking for and documenting the income levels of its customers.

Another possible way to alter produce sales operations to avoid violating tax laws and regulations is to tie your produce sales operations to another exempt purpose. Typically, this is done by either making your farming operations part of a job-training program for at-risk, underemployed, or unemployed individuals. However, the IRS closely scrutinizes such operations to make sure that the business activity is not conducted on a scale that is larger than necessary to support the tax-exempt job-training program.

Both of the above options above involve crafting your produce sale operations to comply with federal tax laws and regulations. However, it is important to reiterate that this area of law is uncertain. It is incredibly important to talk with a lawyer to determine how to structure your revenue generation operations to make sure it does not subject your organization to tax liability and possibly jeopardize the organization’s tax-exempt status.

Rather than deal with the risks that come with uncertainty, many organizations that regularly operate a revenue generation activity have chosen to free themselves of the restrictions placed upon tax-exempt organizations by starting a for-profit entity to house its business activity. This can be done by either transitioning the entire TENP to a for-profit entity or by creating a for-profit subsidiary of the TENP. The next post will discuss some of the for-profit entity options for mission-driven businesses.

The Detroit Land Bank Authority submitted a resolution to the City Council in January requesting that the City Council authorize the Planning and Development Department to transfer all of the City’s right, title, and interest in the remaining vacant residential parcels—which amounts to approximately 30,000 properties—to the Detroit Land Bank Authority for no cost.

The resolution has not come as a surprise. The Detroit Land Bank Authority’s role has seen a dramatic increase in last few years under former-Emergency Manager Kevyn Orr and current-Mayor Mike Duggan. The DLBA has grown from a small outfit of about 5 staff members to its current 82 full-time staff in just a few years, with ownership of 50,000 parcels within the City. Meanwhile, the real estate division at the Planning and Development Department—which was previously responsible for the majority of City land sales—has been dismantled. Given the quick transition from the Planning and Development Department to the DLBA, the natural question that many have been asking is just what is this land bank thing anyways?

Originally created in 2008 under the authority of the Land Bank Fast Track Act, the DLBA was meant to assist the City of Detroit in its effort to clear title to abandoned property and facilitate its use and development. However, to call it a City department would be incorrect. While it’s official designation is a “public body corporate.” It is managed by a Board of Directors, who selects the Executive Director to run the day-to-day operations of the DLBA. In practice, this means that the DLBA is essentially the land management arm of Mayor Duggan. The Mayor selects 4 of the 5 Board Members and has the power to remove any of the 4 Board Members he selects for any reason at any time. This centralized power structure comes with its advantages and disadvantages.

The advantage of the DLBA is its efficiency. The DLBA acquires properties through various means, cleans the title, and then sells the property to private individuals and entities. Notably, land disposition decisions regarding the DLBA are centralized in the DLBA alone. Unlike with property owned by the Planning and Development Department in years past, there is often no need to get the approval of any other City department. However, this centralized power is also the cause for concern for many regarding the DLBA.

First, there are fundamental concerns with how the DLBA is funded. The majority of its Board of Directors are appointed by the Mayor and it has the power to accept funding from all sources, including from corporations and other for-profit companies. Therefore, there is a concern that private money will directly influence governmental decision-making. Second, there is a concern that the DLBA, with its centralized power regarding land disposition, may be less responsive to and less representative of the general public of Detroit.

The reality is that the DLBA is somewhere in between. While it is efficient and has been an effective partner for some urban agriculture groups looking to expand operations and purchase property, it has also been a point of frustration for others who have tried to purchase property from the DLBA but either haven’t received responses or haven’t been dealt with in a completely forthright manner.

To further complicate matters, the transfer of the remaining 30,000 properties presents more concrete issues for many urban farmers. Many have operated on City-owned property pursuant to year-to-year permits. Some urban farmers have already had land that they were operating on transferred to the DLBA while others are operating on what is still City-owned property. This has prompted many urban farming organizations to examine just how secure their property interests are and to voice questions regarding just what the DLBA is planning to do with all this property.

The concerns described above have not gone unnoticed by the Detroit City Council. Councilwoman Mary Sheffield submitted a memorandum to the Detroit Legislative Policy Division in late-January requesting a report on, among other things, the issues discussed above.

The report called for “a comprehensive, documented, legal and policy statement of the role of the Land Bank in such critical land use, community economic development and blight eradication activities…” Specifically, the report called for three main things:

A newly drafted Intergovernmental Agreement to more clearly the role of the DLBA in the disposition of residentially zoned land considering the dismantling of the real estate division of the Planning and Development Department.

A policy that clearly lays out the processes for how residents can acquire property through the DLBA in the Intergovernmental Agreement

Complete inventory of DLBA-owned property

If you have been operating an urban farm on City-owned property, you should check to see whether it has been transferred to the DLBA or whether it is still owned by the Planning and Development Department. If it has been transferred to the DLBA, any agreement you had with the City to be on the property may have been effectively revoked upon the transfer. Whether the property is currently owned by the Planning and Development Department, you should also consider contacting your local District Neighborhood Manager as well as your local Council Member to figure out what plans the DLBA or the City may have for the property that you have invested in and operated on.

In working with nonprofit organizations around the City, I have encountered several groups that are either misinformed about nonprofit property tax exemption or have been frustrated in their ability to be apply for nonprofit property tax exemption. This post will detail how food enterprises of all sorts, whether for-profit or nonprofit, can limit their tax liability under the Michigan General Property Tax Act.

Property taxes in Michigan are largely governed by the state constitution and the Michigan General Property Tax Act. Article IX, Section 3 of the Michigan Constitution states that the “legislature shall provide for the uniform general ad valorem taxation of real and tangible personal property not exempt by law…” Section 211.27a of the Michigan General Property Tax Act provides that “property shall be assessed at 50% of its true cash value.” True cash value is defined by the Act as “the usual selling price at the place where the property is located.” Once the assessment is made, real property is taxed according to local millage rates. Detroit’s millage rate for 2014 was one of the highest in the state at 84.5085.

Non-Profit Organizations

A.) Legal Qualifications

Section 211.7o of the Michigan General Property Tax Act provides that “real or personal property owned and occupied by a nonprofit charitable institution while occupied by that nonprofit charitable institution solely for the purposes for which that nonprofit charitable institution was incorporated is exempt from the collection of taxes under this act.”

The legal language above can be broken into four basic requirements that a nonprofit organization must satisfy for its real property to be exempt from local property taxes:

Nonprofit organization must own the real property

Nonprofit organization must occupy the real property

Nonprofit organization must be a charitable, educational, or scientific institution, and;

Nonprofit organization must occupy the real property only for the purposes for which the nonprofit organization was created

1.) Nonprofit organization must own the real property

Many nonprofit organizations operate on property that is either owned by a partnering nonprofit organization or other entity, or operate on property owned by a founding stakeholder of the organization. However, in order to be eligible for real property tax exemption, the property must be owned by the nonprofit organization itself. The deed conveying the property to the nonprofit organization must also be recorded. Deed recording can be done at the Wayne County Register of Deeds.

2.) Nonprofit organization must occupy the real property

Michigan courts have interpreted “occupy”, as it is used in Section 211.7o, to require the nonprofit to maintain a regular physical presence on the property. This requirement is satisfied if at least one member or employee of the nonprofit regularly works on the property.

3.) Nonprofit must be a charitable, educational, or scientific institution

As an initial point, it is important to mention that even though an organization has received 501(c)(3) status from the IRS, it may still not be regarded as a “charitable” institution under the Michigan General Property Tax Act. The interpretations of Michigan courts and the IRS as to what is a “charitable” institution differ ever so slightly. Michigan courts have utilized the following six-factor test to make this determination:

Organization must be a nonprofit organization

Organization must be organized for charity

This is determined by looking to a nonprofit organization’s purpose statement contained in its bylaws and articles of incorporation.

Organization must operate as a charitable organization

Under this factor, a tax assessor goes beyond looking at the organization’s bylaws and articles of incorporation and analyzes the operations of the organization. There is no threshold requirement; instead, the assessor will look to the overall nature of the organization and determine whether it is charitable.

Organization cannot discriminate

As a general rule, an organization must operate on a first-come-first-serve basis and cannot select who most deserves their services.

Organization must lessen the burdens of government

Organization must be educational or religious, offer medical services, help people establish themselves for life, construct buildings or works, or provide some other service that the government would or should provide

Organization cannot charge fees greater than what is needed to successfully maintain the organization

While an organization can have profits, the revenues must be directed back towards the effectuation of the organization’s exempt purpose

4.) Nonprofit must occupy the property for its charitable purpose

The last requirement is that the nonprofit organization must occupy the property for the purposes for which the organization was created. Once again, the organization’s articles of incorporation and bylaws will be key. If the organization’s use of the property is necessary for it to implement its purpose, then it will meet this last factor.

B.) Application Process

If you believe that a property owned by your nonprofit organization meets the 4 factor test described above, the next step is completing a nonprofit property tax exemption application and submitting it to the Detroit Board of Assessor’s. The application should contain the following documents:

A cover letter asking that the property at a specific address be exempt from local real estate taxes and briefly describing why the property is exempt under the Michigan General Property Tax Act

Nonprofit property tax exemption application form

A résumé detailing the organization’s charitable purpose and how it utilizes the property at issue to further its charitable purpose

Pictures showing the property being used for its charitable purpose

Recorded deed to the property

Articles of Incorporation

Most recent Corporation Update

Applications can be mailed to or submitted in person at the following address:

Generally, the property taxes for urban agriculture enterprises should be fairly low. Urban agriculture operations are generally located on vacant properties that have historically been assessed as having fairly low true cash value. However, many property assessments haven’t been adjusted in several years. Therefore, if you believe your property assessment is too high, you should look to file a Petition to Board Review (Michigan Department of Treasury Form 618).

There is also a real property tax exemptions that for-profit urban farms should be aware of. The qualified agricultural property exemption, while not a total tax exemption, could provide some tax relief for urban farmers. In order for a parcel of property to be regarded as qualified agricultural property, it either must be classified as agricultural on the current assessment role or devote more than 50% of the parcel’s total acreage to agricultural use. Owners of property that is not classified as agricultural, which would be all Detroit urban farmers, must file an affidavit (Form 2599) claiming the exemption with the local assessor by May 1st. As mentioned previously, the qualified agricultural property exemption is not a total exemption. For Detroit residents, it will reduce the millage rate from 86.7896 to 68.7896.

This is just a brief and basic overview of some of the ways nonprofit and for-profit urban farming enterprises in Detroit may be able to reduce the amount that an enterprise pays in taxes each year. For many urban farming enterprises, taxes are a large burden. If your enterprise is heavily burdened by its taxes, you should consider filing for the property tax exemptions described above and consult with an attorney to explore ways you can further limit your tax liability.

In the last post, I detailed Michigan legislature’s amendments to squatting laws. Essentially, the amendments criminalize squatting in a dwelling and empowers landowners to remove squatters from their land by virtually any method short of a physical confrontation. These amendments are relevant for urban farmers that are currently utilizing property to which they have no legal interest, meaning property that they neither own, lease, or have rights of use.

This leaves urban farmers who have no interest in their land in a bit of a bind. On one hand, acquiring a legal interest in the property being utilized in the form of a lease or license agreement may protect the urban farmer from having their farm demolished by the landowner overnight. On the other hand, if a farmer enters into a legal agreement regarding the property, they will be unable to claim title to the land by adverse possession in the future. Therefore, it is important for urban farmers to be familiar with the basic requirements to how one can obtain legal title to property via adverse possession and to weigh their options and decide whether they want to secure a lesser interest today—either in the form of a lease or license—or hold out and hope to acquire full ownership rights later by way of adverse possession.

Acquiring ownership to property by adverse possession has a long history in Michigan common law. Since the 19th century, the Michigan Supreme Court has recognized adverse possession as a means for a long-time possessor of real property to acquire legal title to the property at issue. Later, the Michigan legislature recognized the common law doctrine of adverse possession.

Under Michigan law, for one to acquire title to real property by adverse possession, they must meet numerous requirements. There possession must be “actual, continuous, visible, notorious, distinct, and hostile” for a period of at least 15 years. Notably, one does not need to enter land lawfully to be eligible to acquire land by adverse possession; even a trespasser my acquire property under this doctrine. However, a person seeking to acquire title to property by adverse possession must maintain all the above requirements for a period of 15 years. Further, Michigan courts presume title in favor of the true owner and require the possessor to establish every element by clear proof.

The first key elements regarding adverse possession concern the nature of the possession. The law states that possession must be “actual, continuous, visible, and notorious.” Essentially, this means that a possessor must take “acts of ownership…of such character as to openly indicate an assumed control or use such as is consistent with [the] character of land in question.” An act of ownership include, but is not limited to, erecting a fence around the property or cultivating crops upon the property.

However, it is not just the nature of the possession that matters. The possession must also be hostile to the interest of the owner. While this does not mean that the possessor must inform the owner of their act of possession, it does mean that one’s possession must be without permission and against the interest of the owner. If a possessor has previously been granted permission to utilize the property at issue, there must be a distinct and positive assertion of a right hostile to that of the owner, and such assertion must be brought to the attention of the owner. If there has been no previous permission, the possessor need only utilize the property in such a way that it would be clear to the landowner that the use is adverse to their ownership interest.

For urban farmers that are farming property which they have not been granted permission to utilize, it is possible that the farmer may meet the legal requirements for obtaining title to property by adverse possession. In order to do so, the urban farm must be continuously maintained on the property for 15 years. Obviously, this is a long-term strategy for acquiring property and any break in occupation of the property will restart the 15 year occupancy requirement. Further, urban farmers who continue to possess the property at issue despite being told by the landowner to leave may be guilty of a misdemeanor under the Michigan Penal Code. Urban farmers also risk being restricted from accessing their farm, and even risk having their farm destroyed by the landowner, at any point. However, for many urban farmers facing obstacles regarding land acquisition, this is a solution that they must be aware of. Given the increasing amount of land speculation from distant individuals and businesses, it may be possible to acquire title to property via adverse possession. However, such a strategy will not come without risks.

This summer, the Governor signed three bills that made significant amendments to Michigan laws regarding squatter rights. The amendments are the culmination of rising frustration with squatters and the rights afforded to them by our legal system. Local media outlets in Detroit portrayed squatting as an increasing trend in which individuals or entire families move into a home without the consent of the owner and without paying any rent. There has also been a perceived difficulty in getting police to remove squatters under trespass laws, as some squatters present invalid rental agreements to police or claim that they have paid the owner. When this occurs, owners are typically left to start an eviction proceeding, a process that can take months.

The amendments went into effect in the fall with the purpose of remedying the above issues. While clearly aimed at limiting the number of people who squat in homes, the amendments may have an impact on urban farmers that utilize property without permission from the landowner.

The most relevant amendments were to the Judicature Act of 1961 and the Michigan Penal Code.

Public Act 223 of 2014 amended the landlord/tenant provisions of the Judicature Act. Prior to the amendments, a landowner could not unlawfully interfere with the possessory interest of the squatter, which often prohibited a landowner from changing locks or taking other measures to restrict squatters from re-entering the property. Further, the Judicature Act also stated that a property owner could not make entry onto the property by force but only in a peaceable manner. The amendments essentially carve out exceptions that enable private property owners to engage in self-help to remove squatters. Pursuant to the amendments, which can be found at MCL § 600.2918, an owner does not unlawfully interfere with an occupant’s possession if the occupant is a squatter. Therefore, a landowner can interfere with the squatter’s possession of the property by, among other things removing the squatter’s personal property and restricting the squatter’s access to the property. A property owner is also entitled to use force to enter the property if the occupant took possession by squatting, but any forcible entry may not include assaulting the squatter. These amendments enable a property owner to eject a squatter and restrict them from reentering the property without facing legal liability.

Public Act 224 of 2014 amended the Michigan Penal Code to make squatting in a person’s home a criminal offense. Prior to the amendments, penal laws regarding trespassing and breaking and entering were common in lawsuits against squatters. However, following the amendments squatting is a crime in itself. The first offense is a misdemeanor while the second, and any subsequent offense, is a felony.

Of particular concern to urban farmers are the amendments to the Judicature Act. Prior to the amendments, if a landowner wanted to remove a squatter and restrict them from reentering their property, they often had to do so by filing an eviction action. Now the Judicature Act enables landowners to remove squatters themselves. This is important for urban farmers because if one is farming land which they have no legal interest in, their access to the property can be legally restricted at any time by the landowner. Unless one is occupying a building, most urban farming squatters won’t have to worry about being charged under the amended Michigan Penal Code. However, the prospect of losing one’s farm at a moments notice and having no legal recourse should give urban farmers pause.

At the very least, urban farmers should be looking to enter legally binding agreements with landowners that establish a legal right to the land being utilized. This could take the form of either a license agreement, which gives one the right to use the property described but can be terminated at-will, or a lease agreement, which gives one the right to possess the property described. Entering an agreement will restrict an urban farmer from later obtaining ownership of the property by adverse possession. However, as my next post will detail, claiming title by adverse possession is extremely difficult in Michigan. Therefore, it is likely advantageous to enter an agreement to provide at least a semblance of land security.